Happy hump day, readers. Phil Rosen here, writing to you from Manhattan. Something critical is brewing and I’m not talking about the office coffee maker.
A reverse currency war is underway, with central banks around the world struggling to keep pace with an aggressive Fed and a soaring dollar that’s climbing like it’s got somewhere better to be.
The greenback is up more than 20% against the British pound and Japanese yen, with the former fresh off an all-time low.
Rather than trying to devalue currencies like in traditional “currency wars,” policymakers are doing the reverse in trying to engineer gains.
Confused? Don’t sweat. I’ve prepared a currency crash-course just for you — scroll down and I’ll meet you there.
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A traveller leaves Gimpo airport after exchanging money in Seoul October 19, 2010.
Truth Leem/Reuters
1. The thinking behind a reverse currency war goes something like this: Central banks want to make their currencies stronger — via monetary policy tightening — so that the US dollar doesn’t leave them in the dust.
This is the opposite of what goes down in a normal currency war, where a country may deliberately try and weaken its currency to make its exports more attractive to trading partners around the world.
At present, currencies that can’t keep up with the dollar end up dealing with more expensive imports, further fueling an already painful cycle of inflation.
Given the past three 75-basis-point rate hikes, the Fed has proven its commitment to taming inflation — and as a result, has sent the dollar soaring to multi-decade highs against other currencies including the yen and the euro.
Now, central banks around the world have followed the Fed in their campaign against inflation, and the Bank of England has said it “will not hesitate” to hike more aggressively come November following its 50-basis-point rate hike this month.
Those comments come as the pound dropped to a record-low against the greenback. The UK imports most of its food and fuel from abroad, and with inflation already running at 9.9%, the pound’s slide means household pain.
And with central banks focused on monetary tightening, these reverse currency wars raise the odds of a widespread economic downturn.
“I think that a [global] recession remains a real possibility, given that several central banks have moved in the direction of tightening monetary policy,” Francesco Bianchi, an economics professor at John Hopkins, told me. “Given that inflation does not seem to fade away, I do not expect monetary policy to change direction soon.”
Analysts from Ned Davis Research wrote in a recent note that the firm’s Global Recession Probability Model now stands at 98.1%.
The only other times the indicator hit this mark was during the pandemic downturn of 2020 and in the financial crisis of 2008.
The analysts pointed out, too, that another key recession indicator has been flashing for 13 of the last 14 months. Similar to the other marker, it’s only been at this level in 2020, 2008, and also early 2000s.
“The Fed believes that maintaining a reputation for stable and low inflation is important to create the conditions for long-term sustained growth,” Bianchi added. “Thus, I do not believe that the Fed will hesitate in fighting inflation, even if this means pushing the economy into a recession.”
How do you see these currency wars progressing? What can stop the dollar’s climb? Email [email protected] or tweet @philrosenn.
In other news:
REUTERS/Brendan McDermid
2. US stock futures fall early Wednesday, after the S&P 500 hit a new intraday low for the year Tuesday. Meanwhile, China’s yuan hit its weakest ever offshore trading level against the US dollar. Here are the latest market moves.
3. Earnings on deck: Paychex Inc., Cintas Corp., and Herman Miller Inc., all reporting. Plus, look out for remarks by Federal Reserve Chair Jerome Powell from the Community Banking Research Conference.
4. BlackRock’s US head of thematic exchange-traded funds broke down which sectors to invest in amid sky-high inflation. Markets are being driven by three key themes, Jay Jacobs said, and there are ways to position a portfolio to capitalize on certain trends. These are his three favorite sectors right now.
5. BlackRock said it’s time to “shun most stocks” with markets underestimating the risk of a Fed-induced recession. Last week’s rate-hike blitz showed that central banks will trigger a downturn, the asset manager said. Here’s what you want to know.
6. Cathie Wood said the US economy could face deflation in the next six months and it could spark a Fed pivot. Aggressive policy may not be necessary, she told CNBC Tuesday, as business activity in the economy is already starting to slow down. “I think they do not appreciate how much demand destruction has taken place out there.”
7. Home-price growth slowed by the most on record in “forceful deceleration” in July, the S&P Case-Shiller index showed. There were monthly price declines for houses in San Francisco, Los Angeles, and other cities in July — all while mortgage rates have jumped to nearly 7% amid Fed hawkishness.
8. A director at the National Association of Realtors explained why real estate will continue to struggle over the next six months. Home sales are in the longest slump in 15 years, and home prices continue to rise despite weaker demand. Nadia Evangelou shared what to expect next for housing and how the Fed’s policy will impact the market.
9. Billionaire investor David Rubenstein explained the key qualities of the greatest money managers he’s interviewed. He shared seven key things to check when considering a fund, including whether the fund manager responsible for the success will stay on board. Plus, he pointed out the most important things to consider before buying index funds or ETFs.
Markets Insider
10. Lumber prices dropped to a new 2022 low as the housing market continues to cool. Homebuilders like Lennar and KB Home are walking away from huge land deals due to the soured outlook in the housing market. Dig into the details here.
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Curated by Phil Rosen in New York. (Feedback or tips? Email [email protected] or tweet @philrosenn).
Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.